China’s “anti-involution” campaign to reduce unhealthy competition could have cross-sector credit effects and will have a significant influence on credit metrics for some corporate issuers. Companies rated by Fitch Ratings are generally larger with strong central government support and tend to be among the more cost-efficient producers in their sectors, so could benefit from output rationalisation.

The impact of the campaign is becoming more evident, for example, in sectors such as cement where output declined by 4.3% yoy in 1H25, as well as in broader fixed asset investment, which has fallen sharply in recent months. There is a risk that the campaign reduces aggregate demand more quickly than supply as investment falls more quickly than productive capacity. This could reduce growth and exacerbate deflationary pressures.

The campaign could be positive for rated consumer service providers in the near term if it reduces the intensity of price wars that are weighing on credit metrics. We think less aggressive discounting may also help provide more stable profitability for vehicle original equipment manufacturers in the medium term. However, anti-involution policies may result in lower levels of steel demand than we expect under our baseline assumptions.

Implementing policies to rationalise supply and competition will face significant challenges. There is a risk that the government may struggle to meet its output rationalisation goals, particularly if a weakening of demand outpaces reductions in supply, or if there is political resistance to plant closures at the local level.

The effectiveness of the government’s efforts to raise consumption will be important in determining the success of anti-involution policies. However, we think a recovery in consumption is unlikely to be sustainable without a durable improvement in consumer confidence and stabilisation in the property sector.